Economic Impact and Project Selection

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Our Six Sigma Green Belt course includes a lesson on project selection.  Students are tasked to identify three or more potential improvement projects and make estimates of the cost to plan and execute the projects in dollars as well as the economic impact of completing the projects in dollars.   They then must explain which project they think is the top priority and why.

Projects are typically selected to improve customer satisfaction and/or reduce the cost of operations.  There may be other compelling reasons to select a project, including the need to comply with laws and regulations.  Organizations are always faced with more potential projects than they can complete, so prioritizing is essential.

One of my Green Belt students recently submitted the following: “I can see in the lesson that “projects may be chosen to comply with a law or regulation.”   I chose a project which must comply with a regulation. I get your point for the financial impact. So, when you must comply with a law or regulation, should you consider a financial impact or not?  When you have multiple projects with great potential savings and another one with no “savings” but no choice to do it or this will close the doors of the business, which one should you choose first?”

I made the following comments in reply:  The point that I was trying to make in the lesson is that you need to comply with the regulation not just because it is a regulation, but also because there are typically economic consequences for NOT complying.  There may be civil or criminal penalties for non-compliance, i.e. fines and/or jail time.  Such consequences are included in laws and regulations to compel compliance.    Saying that complying with the regulation will results no savings fails to recognize the economic impact of not complying.

We need to look at more than just the positive impact of each project.  We must also consider the negative impact of failing to perform the project.   In the end, it is all about choosing the projects that have the most overall impact on the organization.

Your question, rephrased, is:  Should I complete a project that has large savings and go out of business, or should I stay in business and forgo the project with the large savings?  If forced to choose one of the two options, I would certainly choose to stay in business.  In practice I would do both projects, but the “stay in business” project would be my top priority.

Your comments or questions about this article are welcome, as are suggestions for future articles.  Feel free to contact me by email at roger@keyperformance.com.

About the author:  Mr. Roger C. Ellis is an industrial engineer by training and profession.  He is a Six Sigma Master Black Belt with over 50 years of business experience in a wide range of fields.  Mr. Ellis develops and instructs Six Sigma professional certification courses for Key Performance LLC.   For a more detailed biography, please refer to www.keyperformance.com.

 

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